Carbon pricing beyond borders: assessing climate policy spillovers from the EU carbon border adjustment mechanism

EU CBAM is nudging trade-exposed partners towards carbon pricing, but spillovers are concentrated in high and upper middle-income countries

The European Union has some of the world’s most ambitious climate policies, yet it only accounts for a small share of global carbon emissions. Achieving meaningful global emissions reductions thus depends on other countries strengthening their own climate policies. The EU’s carbon border adjustment mechanism (CBAM) incentivises EU trading partners to adopt domestic carbon pricing systems to retain carbon revenues at home. Whether this incentive is sufficient to encourage such policy diffusion is an important question for global climate governance. 

This paper examines whether CBAM has increased the adoption of carbon pricing policies in third countries. Using data on trade exposure to CBAM-covered sectors and the evolution of carbon pricing mechanisms in 163 countries between 2014 and 2025, we estimate the effect of exposure to CBAM on the likelihood of non-EU countries adopting carbon pricing policies. We find that countries with greater trade exposure to CBAM have significantly increased announcements of carbon pricing policies since the European Commission previewed CBAM in 2019. On average, a one-percentage point increase in a country’s CBAM exposure raises the probability of adopting a carbon pricing policy by about 2 percent. 

This result suggests that the EU’s CBAM can generate positive international spillovers by encouraging the wider adoption of carbon pricing policies. However, these effects are concentrated among high- and upper middle-income countries, indicating that developing countries face technical and institutional constraints in adopting similar carbon pricing policies. 

Source: Bruegel